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Adj Capitalization Rate article

How is the Adj Capitalization Rate calculated for commercial real estate investments and developments? What are the factors that the Adj Capitalization Rate takes into consideration when shown in a proforma income statement, and what is ignored? Why is the Adj Capitalization Rate useful for investment real estate? These are the questions that are explored using the Proforma Example in this article.

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Video Title: Learn about the Adj Capitalization Rate

Video Publication_Date: Saturday, November 25, 2023

Video Duration: 1:58

Video Description:
The topic for this commercial real estate investment analysis video is Adj Capitalization Rate. Throughout the video planEASe Software is used to illustrate Adj Capitalization Rate. The video does not use the current Proforma Example, but all the factors that the Adj Capitalization Rate are sensitive to are covered.

Initial Investment = $3,300,000.00
Total Gross Income$365,472$372,443$370,410$376,040$384,217$414,321
Less: Vacancy & Credit Loss19,0843,20214,6205,0493,50150,321
Effective Income$346,387$369,241$355,790$370,992$380,717$364,000
Total Operating Expenses$69,400$71,244$73,141$75,094$77,103$79,170
Net Operating Income$276,987$297,997$282,649$295,898$303,614$284,830
Capitalization Rate8.39%9.03%8.57%8.97%9.20%8.63%

In this case the 2010 Capitalization Rate was calculated by:

2010 Net Operating Income (NOI)$276,987
divide by the Price$3,300,000.00
equals the 2010 Cap Rate8.39%

  • Asking Price, Scheduled Income(Current Year Only), Vacancies (Current Year Only), Expenses (Current Year Only), Capital (Development) Spending (from Previous Years)
  • Time Value of Money, Sale Proceeds, All Financing (Loans), Other Years NOI, All Taxes

    ... and a lot of other things
Why is Adj Capitalization Rate useful?

If you are a developer you can think of the Adj Capitalization Rate as a Developer's Capitalization Rate. If you are looking at an investment that is a development, rehab, or has major vacancies that need to be leased up, the traditional Capitalization Rate might not give you a valid perspective. Using the Cap Rate on a year that has a stabilized NOI typically yields a better number. This is what the Adj Capitalization Rate is designed for. It can be looked at in years beyond the first year, and it adds any additional spending items to the price. Some of those spending items might include tenant improvements, commissions, rehab construction items, development construction items, and so on.

The Adj Capitalization Rate does not take into account financing. For that, look to the Adj Cash on Cash.

What is the Adj Capitalization Rate Sensitive to:

Price, Expenses, and Revenue Items (Rent Increase/Decrease, Vacancy, Reimbursements, Free Rent), Tenant Improvements, Commissions, Rehab Construction Items, Development Construction Items

The Adjusted Capitalization Rate is shown in these planEASe Reports:

Written by
Michael Feakins, CCIM
of planEASe Software